The San Francisco Fed has come out with a research paper
connecting the dots between the retiring baby boomers and stock
prices. The thinking is that the boomers will divest themselves
of stocks as they retire and eat into their savings. This is an old argument, but I still
found it interesting.

The authors, Zheng Liu and Mark M. Spiegel have attempted to
quantify the implications. Their principal conclusions:

We find that the actual P/E ratio should decline from about 15 in
2010 to about 8.3 in 2025.

On the brighter side, as the M/O ratio rebounds in 2025 (BK: M/O
= Baby Boomers die), we should expect a strong stock price
recovery. By 2030, our calculations suggest that the real value
of equities will be about 20% higher than in 2010.

These conclusions are just horrendous! The suggestion is that
there is a 15-year bear market in front of us. Multiples will
fall by 50%!! I loved the “good news” from the report, that
stocks might be 20% higher than 2010, but we have to wait 20
years to see that improvement.

Bloomberg interviewed Spiegel about this
report. There was one comment that I thought was telling:

“We do see it as something of a headwind as the economy is
attempting to recover.”

This is the worst kind of "Fed Speak" in my opinion. These deep
thinkers have it completely wrong. They think that the key to
having a stronger economy is higher stock prices. So they spend
all of their efforts dreaming up ways to keep the S&P ramping
up. I think it is the exact other way around. If the economy were
to be growing, it is reasonable to assume that stock price might
rise. It is completely false to assume that attempts to jigger
stocks higher will lead to a stronger economy.

The dog wags the tail. The tail does not wag the dog.

This is what we get for having academics from Princeton running
the show. They have the cause and effect backwards. No wonder the
economy sucks.